Shake Shack Stock Price Falls Today as Insiders Sell $1.3 Billion in Shares (NYSE: SHAK)

shake shack stock priceThe Shake Shack stock price fell 6.6% to $45.26 today (Thursday) after pre-IPO investors decided to sell roughly 26.2 million shares.

Shake Shack Inc. (NYSE: SHAK) filed with the U.S. Securities and Exchange Commission to convert all of its 26.2 million Class B shares into Class A shares. While both classes are common stock, Class A shares have more voting rights than Class B.

According to The Wall Street Journal, the owners of those SHAK shares will sell them after the conversion. At yesterday's closing price of $48.38, 26.2 million shares are worth approximately $1.3 billion in Shake Shack stock.

The sellers include Shake Shack founder Danny Meyer and top shareholder Leonard Green. The SEC filing states Meyer will reduce his stake in the stock to about 30,000 shares.

The Shake Shack stock price skyrocketed during its first five months on the market. From January to May, shares shot up 111% to an all-time high of $96.75. They have fallen 53.2% since.

Now the people who issued SHAK stock will be responsible for sending it lower. According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, that's a huge red flag for retail investors.

"If these insiders believed the Shake Shack stock price was cheap and that the company had better days ahead, they'd be holding on or even buying more," Fitz-Gerald said.

And that's not the only reason to avoid SHAK stock...

Why the Shake Shack Stock Price Is Too High

shake shack stock priceSHAK stock trades at an unwarranted premium compared to other fast-food competitors. The company's forward price/earnings (P/E) ratio and price/earnings to growth (PEG) ratio are 10 times higher than those of Chipotle Mexican Grill Inc. (NYSE: CMG) and McDonald's Corp. (NYSE: MCD).

Those metrics indicate each Shake Shack store is worth $50 million. That's illogical considering how little the company has grown during its eight months on the market.

"If the Shack is going to achieve a McDonald's-like valuation per location, the company would have to open approximately 864 restaurants representing a 1,170% expansion from the 68 locations they operate today," Fitz-Gerald said.

With such an inflated valuation per location, there's no way Shake Shack's market valuation could be any different.

The Bottom Line: The Shake Shack stock price took a beating today as IPO investors plan to sell off $1.3 billion in stock. We recommend avoiding SHAK stock. Shares of the burger chain will keep declining over the long term as its hype wears off and inflated valuation becomes transparent.

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